Chapter 1077: The Great Inflation
The Chancellor of the Exchequer continued to shake his head. "Mr. Pitt, to raise the funds needed for reinforcing the Cape of Good Hope and intervening in the Caribbean over the coming months, I have already borrowed over four hundred thousand pounds from the banks."
"Currently, the interest rate has been pushed to nine point five percent."
"If we seek a further loan of five hundred thousand pounds, the interest will undoubtedly soar above twelve percent!"
The British government’s primary financing channels were private banks—even the quasi-central Bank of England was a private institution. The greater the government's demand for capital, the higher these capitalists would jack up the interest rates. It was exactly as France had been before its financial reforms.
Of course, the British government’s current debt-to-GDP ratio was not yet excessively high, so interest rates hadn't reached the staggering twenty percent levels once seen in France.
Petty turned his gaze toward Grenville. "Prime Minister, until we resolve the sugar crisis, we may still need to borrow heavily. It would be unwise to drive interest rates too high at this moment."
Grenville nodded, his brow furrowed. Over the past two years, Britain's fiscal situation had been far from optimistic due to sugar subsidies and French competition in industrial goods. Five hundred thousand pounds was a sum that required careful deliberation.
He leaned toward William Pitt and whispered, "Perhaps we must raise the income tax a little further."
He let out a heavy sigh. "The pressure from Parliament will be immense."
William Pitt, however, appeared remarkably relaxed. "Prime Minister, there is absolutely no need to increase taxes."
He then looked at Petty. "Nor is there any need for large-scale loans."
The men in the room turned to him in confusion.
William Pitt smiled. "Have you all forgotten? The pound sterling can no longer be directly exchanged for gold. We only need to issue an additional five hundred thousand pounds in currency to easily save the Boulton-Watt Company."
"That is absolutely out of the question!" Petty interrupted, shaking his head. "Mr. David Hume clearly pointed out that over-issuing currency triggers inflation, which in turn leads to the collapse of the price system. We must avoid the bitter lesson of the Spanish."
David Hume was the author of 'Of Money' and had proposed the theory of inflation in the mid-eighteenth century. After the discovery of the New World, Spain had acquired vast amounts of gold and silver, which ultimately triggered a massive inflation across Europe. Prices skyrocketed four to seven times over several decades, bankrupting a huge portion of the lower class.
William Pitt seemed to have anticipated this objection. He replied immediately, "It is merely five hundred thousand pounds, which is less than one point six percent of last year’s fiscal revenue. This will not have any significant impact on prices."
"Furthermore, once our financial situation improves, we can gradually withdraw the excess paper notes from circulation. It will be as if nothing ever happened."
Admiral Jervis, standing to the side, nodded excitedly. "You’re right! That way..."
He paused, looking at Petty with a hint of uncertainty. "That's correct, isn't it?"
The Chancellor hesitated before nodding. If it was only an extra five hundred thousand pounds, it likely wouldn't cause much of a stir.
Seeing that even the Chancellor of the Exchequer did not oppose the idea, Grenville felt a wave of relief. "Very well, Mr. Petty. Please submit a proposal for the additional issuance to me as soon as possible."
"Understood, Prime Minister."
As Petty answered, he suddenly recalled the recent headaches that had been plaguing him—the Cape of Good Hope funding, the Persian loan agreement, and several other matters. His eyes lit up.
If they issued a million pounds, it would still only be about three point two percent of their fiscal revenue. The resulting inflation would be perfectly manageable.
This was far better than paying those cold-blooded bankers nine point five percent interest.
He quickly addressed Grenville. "In fact, I believe we could stand to issue a bit more—perhaps a million pounds. This would save the treasury tens of thousands of pounds in interest payments."
The Prime Minister exchanged a look with William Pitt and nodded. "We can certainly consider that."
The members of the British Cabinet immediately began a cheerful discussion on the operation of 'creating money out of thin air.'
They failed to realize that printing money was even more addictive than gambling.
William Pitt’s premise that it 'wouldn't cause much impact' relied on a firm control over the scale of issuance. However, once that door was opened, it was nearly impossible to close.
Whenever a new Chancellor of the Exchequer took office and faced financial difficulties, they would look at the precedent set by their predecessor and think, 'Why was he allowed to do it while I have to suffer here?'
Inevitably, they would choose the path of least resistance.
Furthermore, financial theories of this era were still quite primitive. David Hume had never studied the difference between issuing more gold and silver coins versus issuing more paper money.
The former was commodity money; even if supply increased, a portion would be hoarded and taken out of circulation. Paper money, however, could only be used for circulation. Once people had it, they would find every way possible to spend it, making the resulting inflation far more severe than that caused by precious metals.
According to later theories of inflation, the rapid circulation of currency leads to a lengthening of the cost transmission chain, self-fulfilling inflationary expectations, and the inflation of asset bubbles. The inflation triggered by a three point two percent over-issuance would be far greater than three point two percent.
Moreover, there was a certain foreigner with modern financial knowledge and vast capital who was very eager to fan the flames of British inflation.
Two hours later, as Henry Petty left 10 Downing Street, he felt a twinge of regret that he hadn't suggested the issuance of paper money sooner.
Had they done so a month ago when France declared war on Algiers, Britain wouldn't have been forced into idleness due to financial constraints.
...
Algiers.
In a valley in the central Atlas Mountains, Ney studied the map where his staff officers had marked their current position. He was weighing whether to camp in the valley for the night or push through to Arsenis further west. At that moment, his guard arrived with a messenger in tow.
The messenger was clearly a Berber. He dismounted, tipped his hat to Ney, and spoke in slightly halting French. "It is an honor to meet you, Colonel. I saw you once from a distance when I was in Sousse."
Ney’s reputation in Tunisia was immense, being one of the two commanders who had famously repelled the invasion of the Algiers and Morocco coalition against overwhelming odds.
A staff officer nearby cleared his throat, and the messenger quickly got back to business, handing a letter to Ney. "Colonel Gemile asked me to deliver this to you."
"At noon four days ago, our forces occupied Mitidja. You may enter the city at any time."
Ney was stunned.
According to the plan, Gemile was supposed to pin down Kuloğlu's troops in the east. How had he ended up in Mitidja?
The messenger continued excitedly, "Colonel Gemile left Lieutenant Colonel Damat in command of twenty-five hundred men to continue the siege of Kuloğlu, while he led fifteen hundred soldiers to take Mitidja."
It was true that the Algiers Janissaries had seen their elite decimated years ago. Now, an army of thirteen thousand was being held in a death grip by a mere twenty-five hundred men from the French Tunisian Legion.
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